US Gulf Coast ultra-low sulfur diesel has surged more than $2.10/gal, or 77%, since late February, setting four record highs in September alone — including an all-time high of $5.18/gal on Sept. 15 — as global supply disruptions pull American barrels into export markets and tighten domestic inventories.

Platts, part of S&P Global Energy, most recently assessed US Gulf Coast ULSD at $4.912/gal on Sept. 18. The latest leg up followed Russia's decision to extend restrictions on diesel exports through the end of October, after Ukrainian strikes disrupted the country's refineries. Moscow's measures restrict diesel, marine fuel and gasoil flows in an effort to stabilize its domestic fuel market.

Those disruptions have increased demand for US barrels and created profitable export arbitrage opportunities. Low domestic inventories have compounded the upward pressure. Energy Information Administration data released Sept. 16 showed US ULSD inventories at 97 million barrels — well below the five-year average of 113 million barrels.

Refiners max out diesel yields

US refiners have responded by maximizing diesel output. Domestic production rose to 5.036 million b/d, against a five-year average of 4.615 million b/d for the same period, EIA data showed.

Much of that additional supply is heading overseas. S&P Global Commodities at Sea data showed September US ULSD exports averaging 1.635 million b/d, putting the month on course to surpass August's record.

Strong overseas demand plus constrained supply has made diesel the most profitable major refined product for US refiners. Platts assessed the US Gulf Coast ULSD crack spread against West Texas Intermediate crude at $103.19/b on Sept. 18 — up 224% from a year earlier.

For carriers, trucking fleets and shippers already contending with elevated fuel surcharges, the price environment signals sustained cost pressure into the fourth quarter, with export demand showing no sign of easing before Russia's export restrictions expire at the end of October.

Collapsing BO-HO reshapes biofuel economics

The petroleum diesel surge has also rewritten the economics of biodiesel and renewable diesel. The BO-HO spread between CBOT soybean oil and NYMEX ULSD — the biodiesel industry's gauge of production costs and margins — has fallen to its lowest level in seven years.

A lower BO-HO encourages biodiesel producers to maximize output. As the spread widens, production costs climb, blending economics deteriorate and margins turn unfavorable.

The BO-HO has plunged by more than 72 cents/gal, or 110%, since the start of September. Platts assessed the spread at minus 6.83 cents/gal on Sept. 18, its lowest since May 2019. The decline primarily reflected the sharp rise in diesel values: over the same period, US Gulf Coast ULSD climbed more than 21 cents/gal, or 4.56%, after peaking at the Sept. 15 record.

The industry entered September with biomass-based diesel production already elevated. EIA data showed biodiesel production up 42% since the start of the year to 129 million gallons in May, while renewable diesel output rose more than 62% over the same period to 318 million gallons.

D4 RINs slide despite lower generation

Both fuels generate D4 Renewable Identification Number credits under the EPA's Renewable Fuel Standard, which obligated parties — gasoline and diesel producers and importers — use to demonstrate compliance with blending requirements.

The low BO-HO spread has strengthened incentives to produce biomass-based diesel and generate the associated credits, and D4 RIN prices have come under pressure as a result. D4 RINs fell 36.75 cents, or 16%, between Sept. 1 and Sept. 18, when Platts assessed them at $1.9275/RIN — down 13 cents from the previous day.

EPA data released Sept. 17 showed August RIN generation dropped, with D4 output falling to a five-month low. Prices did not move higher despite the supply-side signal. Market participants attributed the lack of upside to the low BO-HO spread, which continues to incentivize current RIN production and keep prices subdued.

With Russia's export restrictions running through end-October and US inventories 16 million barrels below the five-year norm, diesel-driven margin strength — and the resulting pressure on D4 RINs — looks set to persist into the fourth quarter unless global supply conditions ease.